Mini Exam #3 A5-A6 Flashcards
MCQ-10261
Management’s written representation to the auditor in connection with a governmental audit would most likely include:
A. Negative assurance that the government has complied with compliance requirements.
B. Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist.
C. A statement that management had identified and disclosed all material government programs to the auditor.
D. A statement that management has disclosed any communications from grantors concerning possible noncompliance.
Choice “D” is correct. The management letter will include a statement that management has disclosed any communications from grantors concerning possible
noncompliance.
Choice “A” is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements.
Management representations do not provide negative assurance.
Choice “B” is incorrect. Management will assert that they have disclosed all known noncompliance or positively state that there was no such noncompliance. Management
representations do not provide negative assurance.
Choice “C” is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor. Management’s
representation is not limited to only material government programs.
MCQ-10241
Kent Industries anticipates that its sales revenue will grow by 5% during the coming year based on historical returns, but also believes there is a slight chance for 10% growth if a
new product that is currently being developed is launched during the year. Kent’s management has prepared two sets of financial statements, one based on 5% growth and the other based on 10% growth, in an effort to plan for the future. Giacomo, CPA, has been hired to examine both sets of financial statements. Which of the following is
true regarding Giacomo’s two reports?
A. The report on the 10% growth financial statements would include a statement that the results might not be achieved, whereas the 5% growth financial statements would not require such a comment.
B. Neither the report on the 10% growth financial statements nor the report on the 5% growth financial statements should provide positive assurance.
C. Both the report on the 10% growth financial statements and the report on the 5% growth financial statements are appropriate for limited use.
D. The 5% growth financial statements would include a restriction on the use of the report, whereas the 10% growth financial statements would not include such a restriction.
Note that the 5% growth financial statements are a financial forecast (based on expected results) whereas the 10% growth financial statements are a financial projection (based on the hypothetical release of the new product).
Choice “C” is correct. Both financial forecasts and financial projections are appropriate for limited use.
Choice “A” is incorrect. Both financial forecasts and financial projections should include a statement that the results might not be achieved.
Choice “B” is incorrect. Examinations of prospective financial statements include positive assurance regarding whether the statements are presented in conformity with AICPA guidelines, and whether the underlying assumptions provide a reasonable basis for the financial statements. Both reports would therefore include positive assurance.
Choice “D” is incorrect. Use of the report on the 10% growth financial statements (projection) would be restricted; use of the report on the 5% growth financial statements
(forecast) could be restricted or unrestricted.
During a review of an issuer, should an auditor inquire about significant deficiencies in internal control?
YES
What are two requried procedures in a review of annual financial statements (in general)?
Inquiry
and
Analytical Procedures
Is communication with a predecessor accountant REQUIRED during a review of annual financial stmts?
NO.
It is allowed, but NOT required
Which of the following statements is true about required procedures in a review of annual financial statements?
A. Obtaining an understanding of internal control is not required, but confirmations of accounts receivable is required.
B. Obtaining an understanding of the client’s operations is not required, but corroboration of management’s material estimates is required.
C. Assessment of fraud risk is not required, but obtaining a representation letter from management is required.
D. Analytical review procedures are not required, but communication with the predecessor accountant is required.
Choice “C” is correct. Assessment of fraud risk is not required, but obtaining a representation letter from management is required.
Choice “A” is incorrect. While it is true that obtaining an understanding of internal control is not required in a review of annual financial statements, confirmation of accounts receivable is an audit procedure that is not required in a review engagement.
Note: Obtaining an understanding of internal control is required in a review of interim financial statements (when the annual financial statements are audited).
Choice “B” is incorrect. Obtaining an understanding of the client’s operations is required, and corroboration of management’s material estimates is an audit procedure
that is not required in a review engagement.
Choice “D” is incorrect. Analytical review procedures are required, whereas communication with the predecessor accountant is not required.
Is there a restricted use paragraph on an Audit of internal control?
NO.
However, a report on internal control matters during a financial stmt audit would include a restricted use paragraph.
MCQ-10303
A report on a nonissuer’s internal control based on an audit of internal control should include a statement indicating that:
I. Because there are inherent limitations in internal control, misstatements may occur and not be detected.
II. Projections of the evaluation of internal control to future periods are subject to the risk that the internal control may become inadequate.
III. The report is intended solely for the information and use of the audit committee, management, and other specified parties.
A. I and III only.
B. I, II, and III.
C. I and II only.
D. II and III, only
Choice “C” is correct. Each of the first two statements would be included in the inherent limitations paragraph of the report. The third statement, indicating restricted use, would
not be included as there is no restriction on the use of this report. (A report on internal control matters noted during an audit on fin stmts would, however, include a restricted use
paragraph.)
Choices “A”, “B”, and “D” are incorrect, based on the above explanation
Robbins Company uses an outside service organization called Payroll Plus to process its payroll. Matthews, CPA is the auditor of Payroll Plus, and Stevens, CPA is Robbins’
auditor. Stevens’ assessment of the risk of material misstatement may be based on the effective operation of controls surrounding payroll if:
A. Matthews’ audit report indicates that none of the significant deficiencies in internal control identified at Payroll Plus constitute material weaknesses in internal control.
B. Matthews provides a report on controls placed in operation.
C. Matthews issues a standard, unmodified opinion on the financial statements of the service organization.
D. Matthews provides a report on controls placed in operation and tests of operating effectiveness
Choice “D” is correct. Stevens may assume controls are operating effectively if Matthews provides a report on controls placed in operation and tests of operating effectiveness, and if this report supports a reduction in the assessed level of control risk.
A SOC 1 Type 2 report provides the user auditor with assurance about the design, implementation, and operating effectiveness of the service organization’s internal
controls.
Choice “A” is incorrect. The fact that none of the significant deficiencies in internal
control are serious enough to be material weaknesses is not sufficient to support a
reduction in the assessed level of control risk.
Choice “B” is incorrect. A report on controls placed in operation does not provide
evidence about operating effectiveness and therefore cannot be used to support a
reduction in the assessed level of control risk. A SOC 1 Type 1 report does not include
the testing of the operating effectiveness of controls at a service organization and
therefore cannot be used as a basis for assessing control risk below maximum.
Choice “C” is incorrect. An audit report on the financial statements of Payroll Plus does
not indicate whether controls are operating effectively. It only indicates that the
financial statements are fairly stated, and this could be the case regardless of how
controls are functioning.
The accountant may report on agreed-upon procedures applied to specified elements, accounts, or items of financial statements:
A. Without being independent of the client company since no opinion or any other form of assurance is given on the sufficiency of agreed-upon procedures performed.
B. But must be independent of the client company and give no opinion or any other form of assurance on the sufficiency of the agreed-upon procedures applied.
C. But must be independent of the client company and provide limited assurance on the sufficiency of the agreed-upon procedures performed.
D. As long as the accountant assumes responsibility for the adequacy of the agreed-upon procedures the accountant has agreed to perform
Choice “B” is correct. The accountant must be independent to perform an agreed-upon procedures engagement, and should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The engaging party (often the client) is responsible for acknowledging the adequacy of the procedures.
Choice “A” is incorrect. The accountant must be independent to perform an agreedupon procedures engagement.
Choice “C” is incorrect. The accountant should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The engaging party (often
the client) is responsible for acknowledging the adequacy of the procedures.
Choice “D” is incorrect. The engaging party (often the client) is responsible for the adequacy of the procedures.
What kind of asurance is provided for a report on compliance with contractual or regulatory requirements related to audited financial stmts.
NEGATIVE ASSURANCE
When do overdue audit fees impair independance?
When they are overdue by MORE than 1 year.
What are 3 differences between an Audit and a review of a non-public entity?
Audit - More robust, positive assurance, understanding of internal control (during planning stage in connection with entity and environment).
Review - Less robust, Negative Assurance, under SSARS does NOT require an understanding of internal control.
***NOTE: An interim review of annual financial stmts falls under SAS or PCAOB requirements for a non-issuer and issuer, respectively, and would require an understanding of internal control.
MCQ-06340
An accountant’s standard report issued after compiling the financial statements of a
nonissuer should state that:
A. The accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management.
B. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.
C. A compilation consists principally of inquiries of company personnel and analytical procedures.
D. I am not aware of any material modifications that should be made to the accompanying financial statements
Choice “A” is correct. An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that the accountant was not required to perform any procedures to verify the accuracy or completeness of information provided by management.
Choice “B” is incorrect. A review report (and not a compilation report) states that a
review “is substantially less in scope than an audit in accordance with GAAS, the
objective of which is the expression of an opinion.”
Choice “C” is incorrect. A review report (and not a compilation report) states that a
review “includes primarily applying analytical procedures to management’s financial
data and making inquiries of company management.”
Choice “D” is incorrect. A review report (and not a compilation report) states that, “I am
not aware of any material modifications that should be made to the accompanying
financial statements
MCQ-09954
Which of the following standards should a CPA firm apply in a review of Management Discussion and Analysis?
A. Statements on Standards for Consulting Services.
B. Statements on Auditing Standards.
C. Statements on Standards for Attestation Engagements.
D. Statements on Standards for Accounting and Review Services.
Choice “C” is correct. A CPA should refer to Statements on Standards for Attestation
Engagements (SSAE) for a review of Management and Discussion Analysis.
Choice “A” is incorrect. A CPA should refer to Statements on Standards for Consulting
Services when performing consulting services.
Choice “B” is incorrect. A CPA should refer to Statements on Auditing Standards when
performing an audit for a nonissuer.
Choice “D” is incorrect. A CPA should refer to Statements on Standards for Accounting
and Review Services when performing a preparation, compilation, or review of historical financial statements for nonissuers. SSARS also applies to preparation and compilations of pro forma and prospective financial information.
